US Treasury eyes support for community loan funds

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By David Lawder
WASHINGTON, Oct 23 (Reuters) – The U.S. Treasury Department is considering ways to provide support through its bailout program to community development loan funds, a senior Treasury official said on Friday.
Gene Sperling, counselor to Treasury Secretary Timothy Geithner, said loan fund support could be developed as an extension to efforts unveiled this week to provide more capital to small banks and other community lenders through the Troubled Asset Relief Program (TARP).

“This is not an easy hurdle. But we are interested in looking and exploring whether, particularly on the liquidity side, there are things we can do,” Sperling told a conference on banking services for low-income communities.

Community development loan funds are non-profit organizations that borrow from multiple sources and loan money to local small businesses and affordable housing projects.

Their sources of capital, such as community reinvestment contributions from larger banks or grants from foundations, have dried up because of the recession.

The funds have had difficulty selling loans into gridlocked secondary credit markets.

But unlike small banks, credit unions and other deposit-
taking community lenders, community development loan funds do not come under the purview of federal banking.

Advocates for the funds have argued that providing government capital to them would be an extremely efficient means of increasing lending to small businesses.

Sperling said that presents a problem because TARP capital cannot be directly injected into unregulated entities.

“It’s a challenge because these (loan funds) are not your typically regulated institution and you operate in the Financial Stability Plan and TARP under a world of significant regulatory supervision and compliance and oversight and these are things that we have to take seriously,” he added.

He said another possible area to explore was whether external entities such as larger banks or other private investors could be given incentives to purchase existing loans from the funds, which would give them the needed liquidity to make new loans to small businesses.

But the idea is one that requires much more discussion and consultation with the financial industry and community lenders, Sperling said.

According to a report earlier this year from the
Federal Reserve Bank of San Francisco, there were about 500 U.S. community development loan funds with more than $3.5 billion in assets in 2005. Most were small, with median capital of about $8.9 million.

Pooling loans for small businesses outside of traditional banks is an idea also advocated by Sen. Mark Warner, a Virginia Democrat who has asked the Obama adminsitration to set up a $50 billion loan fund for small businesses with $40 billion in TARP funds and $10 billion in contribution from participating banks.

Warner’s proposal, endorsed by 32 other senators, said the pooled funds should remain off the balance sheets of banks so that the money would be loaned out, not simply used to bolster bank capital against losses.

The senators also said in a letter to President Barack Obama this week that the funds should be the funds should be loaned only to operating companies, not real estate development firms, to ensure that the businesses in most need of credit get funds quickly.